An issue of preferred stock at once creates two kinds of ownership, — one, that of the preferred shareholder, with the less risk and presumably a corresponding limitation of in come; the other, that of the common share holder, with the greater risk and no limita tion of income but the earning power of the business. If a corporation has no securities but stock outstanding, obviously the pre ferred and the common share the entire ownership. In that case the common share holder gets the advantage of trading on the equity, or taking a greater risk in expectation of a greater income, which we shall discuss later, without running the risk he would, if there were bondholders, of having the pro perty taken entirely out of his control under adverse circumstances. To offset the advan tage just mentioned, the holder of common stock must share immediate control with the preferred stockholder. Conversely, the pre ferred stockholder gets the advantage of less risk and the advantage of a large share of immediate control. Compared with a bond holder, he accepts the disadvantage of not being able to get possession of the entire con trol for his own benefit in case his income is less than he anticipates.
Income on preferred stock is limited usu ally to some definite amount. Commonly this runs all the way from 4 per cent to 8 per cent. Commonly, too, this limited income off sets the lessened risk gained by the prefer ence. Some large issues of preferred stocks showing varying dividend rates that are fixed are: Union Pacific Railroad, 4 per cent; Baltimore & Ohio Railroad, 4 per cent; Kan sas City Southern Railway, 4 per cent; Southern Railway, 5 per cent; Interborough Metropolitan Company, 5 per cent; St. Louis Southwestern Railway, 5 per cent; American Agricultural Chemical Company, 6 per cent; Boston & Maine Railroad, 6 per cent; United States Rubber Company, second preferred, 6 per cent; Central Leather Company, 7 per cent; Crucible Steel Company, 7 per cent; International Harvester Company, 7 per cent; United States Steel Corporation, 7 per cent; United States Rubber Company, 8 per cent.
Preferred stock may not reach its limit of income at the stated dividend rate, but its pre ference may end there. It may have the right, after the common receives a certain dividend, to share with the common in any further dividend disbursements. If it has this right to further income, it adds the name of "par ticipating" stock. For example, a holder of the preferred stock of the Chicago, Milwau kee & St. Paul Railway is entitled to 7 per cent before the company can pay anything on the common. After the company has also paid 7 per cent on the common, the preferred shareholder has a right to share equally with the common shareholder in any further dis tribution of dividends. If the company should
pay the common shareholder 8 per cent, it would also have to paz the preferred share holder 8 per cent.
It may be that whatever the company pays on the common it will have to pay that much extra on the preferred. That is the case of the Chicago & Alton Railroad, which has a comparatively small amount of preferred stock outstanding. On this =stock the com pany must pay 4 per cent dividends before paying any dividends on the common; then, if it pays 1 per cent on the common, it must pay 5 per cent on the preferred. It did so pay extra dividends of 1 per cent, August, 1908; 4 per cent, August, 1909; 2 per cent, February 1910; August, 1910, none. The present Chi cago & Alton Railroad issued the stock when the company in 1906 consolidated the Chi cago & Alton Railway and the former Chicago & Alton Railroad, and wanted, by the use of this security, to get in comparatively small amounts of the preferred and common stocks of the old railroad company then outstanding.
Other examples of participating stocks are: Buffalo, Rochester & Pittsburgh Railway Company, 6 per cent preferred; after 6 per cent is paid on both classes, both share `equally. Wisconsin Central Railway, 4 per cent preferred; after 4 per cent is paid on both classes, both share equally. Minneapo lis, St. Paul & Sault Ste. Marie Railway, 7 per cent preferred; after 7 per cent is paid on both classes, both share equally. Westing house Electric and Manufacturing Company, 7 per cent preferred; after 7 per cent is paid on both classes, both share equally. In the case of the Chicago Northwestern Railway 7 per cent preferred stock: after the common stock has received 7 per cent, the preferred is entitled to additional dividends up to 3 per cent more, then common is to receive a fur ther 3 per cent. Under this arrangement the preferred is receiving 8 per cent and the common 7 per cent. Unless there are some further restrictions, this seems a very honest course, as the common stock amounts to nearly six times the preferred, and its holders would naturally rather have a surplus accumu late till the full 3 per cent extra could be paid on both preferred and common stocks. The right to further dividends may not amount to full participation, but only to receive an additional sum, as in the case of the Pitts burgh, Cincinnati, Chicago & St. Louis Rail way 4 per cent preferred stock, carrying the right, after 3 per cent is paid on common, to an extra 1 per cent. The company is now pay ing 5 per cent on its preferred and 4 per cent on its common stock. Allis Chalmers Com pany preferred is entitled to 7 per cent, and, after 7 per cent is paid on the common, the preferred is entitled to 1 per cent extra.